A balance sheet is a snapshot of your company’s health at a moment in time. The snapshot includes a list of your business’s assets, liabilities, and owners’ equity. The sum of all items should balance out to match a formula on the left side of the balance sheet: Assets + Liabilities + Owners’ Equity = Net Income (Assets – Liabilities – Owners’ Equity).
A company’s assets include short-term and long-term items. These can include cash, accounts receivable, inventory and property. A company’s liabilities include all money owed to others including rent, utilities, and loans. The company’s equity is the amount contributed by its shareholders.
When evaluating your company’s health, it is important to look at your balance sheet alongside the other financial statements of your business. This allows you to dig deeper into the numbers and make smart and guided decisions for your business.
The first step in analyzing your company’s health is to look at the balance sheet as of a certain date. The balance sheet is based upon past data, so if you are seeing a negative trend in your cash, you should investigate further.
Another way to evaluate the information in your balance sheet is to look at your current ratio and days cash on hand. These calculations are a good indicator of whether your company is able to meet its immediate debt payments.
You can also use your balance sheet to calculate leverage ratios, such as the debt-to-equity ratio, which measures the value of the company compared to its debt. The total of all these calculations and more can help you make informed financial decisions for your company.
Your balance sheet is arranged in a specific format, depending on where you are located and the accounting standards that apply to your company. For example, the following balance sheet adheres to IFRS and lists the accounts in descending order of liquidity. However, if your company used Generally Accepted Accounting Principles (GAAP), the account names would be listed in ascending order of liquidity.
The next section of your balance sheet identifies your company’s assets and breaks them down into two categories: current and fixed. Current assets are those that can be converted into cash or cash equivalents within a year, such as short-term investments and marketable securities. Fixed assets are those that you expect to hold on to for a longer period of time, such as property and equipment.
The next section of your balance sheet identifies the company’s liabilities and breaks them down into two categories as well: current and long-term. The definition of what is considered a long-term liability is based on the length of the debt or the time frame in which you expect to pay it back. Your long-term liabilities also include any deferred taxes or pensions that will be paid over a long period of time. The final section of your balance sheet includes shareholder’s equity, which is the net amount remaining after subtracting the company’s liabilities from its assets. Bilanz